<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended
SEPTEMBER 30, 1997
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period
From to .
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Commission file number 0-26116
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SPINE-TECH, INC.
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(Exact name of registrant as specified in its charter)
MINNESOTA 06-1258314
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7375 BUSH LAKE ROAD
MINNEAPOLIS, MINNESOTA 55439-2029
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(Address of principal executive offices) (Zip Code)
(612) 832-5600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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As of NOVEMBER 7, 1997, there were issued and outstanding 10,226,576 shares of
Common Stock, $.01 par value.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SPINE-TECH, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 2,269,045 $ 1,724,043
Short-term investments - Note C 18,931,624 9,674,222
Accounts receivable 8,821,027 3,150,981
Inventories - Note B 6,685,703 6,982,802
Deferred tax asset - 2,155,300
Interest receivable 263,993 221,178
Prepaid expenses 539,024 146,362
------------ ------------
Total current assets 37,510,416 24,054,888
Land and building 5,243,301 5,049,315
Furniture and fixtures 732,846 704,857
Equipment 1,680,658 1,087,919
Accumulated depreciation (897,346) (373,299)
------------ ------------
6,759,459 6,468,792
Investments - Note C 1,196,820 3,535,474
------------ ------------
Total assets $ 45,466,695 $ 34,059,154
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,095,257 $ 567,490
Accrued clinical payments 141,231 41,850
Accrued royalties 1,096,959 365,272
Other accrued expenses 2,150,374 437,691
------------ ------------
Total current liabilities 4,483,821 1,412,303
Commitments and contingencies -- --
Shareholders' equity:
Common Stock, par value $.01 per share: authorized
shares - 15,000,000. Issued and outstanding shares:
December 31, 1996 - 9,939,055;
September 30, 1997 - 10,219,966 102,200 99,391
Additional paid-in capital 35,973,522 35,108,809
Retained earnings (accumulated deficit) 4,907,152 (2,561,349)
------------ ------------
Total shareholders' equity 40,982,874 32,646,851
------------ ------------
Total liabilities and shareholders' equity $ 45,466,695 $ 34,059,154
------------ ------------
------------ ------------
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed financial statements.
<PAGE>
SPINE-TECH, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
1997 1996 1997 1996
-------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 16,046,487 $ 1,523,486 $ 39,689,428 $ 4,470,955
Cost of goods sold 3,596,297 472,152 8,996,933 1,601,283
-------------- ------------ ------------- ------------
Gross profit 12,450,190 1,051,334 30,692,495 2,869,672
Operating expenses:
Sales and marketing 4,841,425 1,304,184 12,305,902 2,640,777
General and administrative 1,508,372 995,199 4,322,661 2,320,653
Research and development 893,594 493,227 2,359,699 1,368,850
-------------- ------------ ------------- ------------
Total operating expenses 7,243,391 2,792,610 18,988,262 6,330,280
-------------- ------------ ------------- ------------
Operating income (loss) 5,206,799 (1,741,276) 11,704,233 (3,460,608)
Interest income, net 342,388 292,558 747,269 1,071,429
-------------- ------------ ------------- ------------
Income (loss) before taxes 5,549,187 (1,448,718) 12,451,502 (2,389,179)
Income tax expense 2,220,000 -- 4,983,000 --
-------------- ------------ ------------- ------------
Net income (loss) $ 3,329,187 $ (1,448,718) $ 7,468,502 $ (2,389,179)
-------------- ------------ ------------- ------------
-------------- ------------ ------------- ------------
Net income (loss) per share $ 0.28 $ (0.15) $ 0.65 $ (0.24)
Weighted average shares outstanding 11,742,708 9,874,087 11,473,613 9,802,178
</TABLE>
See notes to condensed financial statements.
<PAGE>
SPINE-TECH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1997 1996
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 7,468,502 $ (2,389,179)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 524,046 216,889
Common Stock and stock options issued
for consulting services 12,262 12,262
Changes in operating assets and liabilities:
Accounts receivable (5,670,046) 943,310
Inventories 297,099 (4,718,197)
Deferred tax asset 2,155,300 --
Interest receivable (42,815) (84,769)
Prepaid expenses (392,662) (195,584)
Accounts payable and accrued expenses 3,071,518 440,348
------------ -------------
Cash provided by (used in) in operating activities 7,423,204 (5,774,920)
INVESTING ACTIVITIES
Purchase of property and equipment (814,714) (3,657,238)
(Purchase) maturities of investments (6,918,748) 8,707,495
------------ -------------
Cash (used in) provided by investing activities (7,733,462) 5,050,257
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock -- --
Proceeds from stock options exercised 855,260 440,887
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Cash provided by financing activities 855,260 440,887
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Increase (decrease) in cash and cash equivalents 545,002 (283,776)
Cash and cash equivalents at beginning of period 1,724,043 1,171,034
------------ -------------
Cash and cash equivalents at end of period $ 2,269,045 $ 887,258
------------ -------------
------------ -------------
</TABLE>
See notes to condensed financial statements.
<PAGE>
SPINE-TECH, INC.
Notes to Condensed Financial Statements (Unaudited)
September 30, 1997
Note A - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended September 30,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. For further information, refer to the financial
statements and footnotes included in the Company's annual report on Form 10-K
for the year ended December 31, 1996.
Note B - Inventories
The components of inventory consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw material $ 91,219 38,653
Work in process 1,216,770 1,285,134
Finished products 5,377,714 5,659,015
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$ 6,685,703 $ 6,982,802
------------ ------------
------------ ------------
</TABLE>
Note C - Investments
The amortized cost and estimated market value of investments are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
As of December 31, 1996:
U.S. government obligations $ 3,525,974 $ 7,691 $ -- $ 3,533,665
Corporate debt securities 6,022,928 -- 66,288 5,956,640
Commercial paper 3,660,794 15,059 -- 3,765,853
------------- ---------- ---------- -------------
$ 13,209,696 $ 22,750 $ 66,288 $ 13,166,158
------------- ---------- ---------- -------------
------------- ---------- ---------- -------------
As of September 30, 1997:
U.S. government obligations $ 1,998,507 $ 272 $ -- $ 1,998,779
Corporate debt securities 6,166,997 299 55,005 6,112,291
Commercial paper 11,962,940 132,070 -- 12,095,010
------------- ---------- ---------- -------------
$ 20,128,444 $ 132,641 $ 55,005 $ 20,206,080
------------- ---------- ---------- -------------
------------- ---------- ---------- -------------
</TABLE>
<PAGE>
The amortized cost and estimated fair market value of investments by
contractual maturity are shown below:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
---------------------------- ---------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Due in one year or less $ 18,931,624 $ 19,009,075 $ 9,674,222 $ 9,645,727
Due after one year 1,996,820 1,197,005 3,535,474 3,520,431
------------- ------------- ------------ -------------
$ 20,128,444 $ 20,206,080 $ 13,209,696 $ 13,166,158
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
</TABLE>
Note D - Net Income (Loss) Per Share
The net income (loss) per share is computed using the weighted average number
of shares of Common Stock and common stock equivalents, if dilutive,
outstanding during the periods presented.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share", which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact is expected to
result in an increase in primary earnings per share for the third quarter ended
September 30, 1997 and 1996 of $.05 and $.00 per share, respectively, and $.10
and $.00 per share for the nine months ended September 30, 1997 and 1996,
respectively. The impact of Statement 128 on the calculation of fully diluted
earnings per share is not expected to be material.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since commencing full-time operations in July 1991, the Company has been
engaged in the design, development, manufacture and sale of spinal implants and
instruments for the surgical treatment of degenerative disc disease and other
spinal conditions. The Company's spinal implants are designed to facilitate
fusion of spinal vertebrae in order to reduce spinal instability that can cause
chronic, disabling back pain.
A clinical trial of the Company's BAK-TM- Interbody Fusion System device
began in April 1992 under an Investigational Device Exemption ("IDE") in the
United States. Based upon data from the clinical trial, the Company submitted a
Pre-Market Approval Application ("PMA") to the United States Food and Drug
Administration (the "FDA"). On May 23, 1996, the Orthopaedic and Rehabilitation
Devices Advisory Panel reviewed and recommended approval of the Company's PMA
application for clearance to market the BAK Interbody Fusion System. On
September 20, 1996, the Company received FDA approval to market the BAK
Interbody Fusion System in the United States, and the Company commenced
domestic commercial shipments of the BAK. Since receiving FDA approval on
September 20, 1996 the Company has submitted supplements to its original PMA.
In May, 1997, the Company received FDA approval to market 31 additional sizes
of BAK implants. In October, 1997, the Company received FDA approval to market
its new BAK/PROXIMITY Interbody Fusion Implant, an advanced, patented implant
design.
In the domestic market, the Company sells BAK implants primarily through
direct sales representatives. Currently, the Company has 42 direct sales
representatives, ten clinical specialists and five regional sales managers, all
of whom live in the geographic areas they service. In addition to these direct
sales representatives, the Company uses independent sales agents in four
geographic areas (for example, Montana, Utah and Nevada are serviced by
independent agents). These independent sales agents employ approximately
twenty salespeople who sell the Company's products. All domestic sales whether
accomplished by direct sales representatives or independent agents are made
directly to hospitals.
The Company has developed and is developing additional products which
address degenerative disc disease and other spinal conditions. In addition
to the BAK Interbody Fusion System, the Company has developed the BAK/C-TM-
which is used in the cervical spine. Like the BAK, the BAK/C is subject to
extensive clinical trials under a separate IDE from the FDA. The BAK/C
clinical trial commenced during the first quarter of fiscal 1995. The BAK/C
has been introduced into certain international markets. As international
approvals are received, the BAK/C will be introduced into additional
international markets.
In May 1995, the Company introduced Cervi-Lok-Registered Trademark-, an
anterior cervical implantable plate and screw system for use in the cervical
spine, pursuant to a 510(k) clearance received from the FDA. While the
product has been rolled-out on a nationwide basis, sales efforts have been
minimal on this product since BAK commercial launch. International roll-out
of Cervi-Lok began in the fourth quarter of fiscal 1995.
In September 1993, the Company entered into an exclusive agreement with
Smith & Nephew-Richards, Inc. ("Smith & Nephew") for the distribution of the
BAK Interbody Fusion System outside of the United States as long as quarterly
minimum purchases were made by Smith & Nephew from the Company. During the
first quarter of 1996, Smith & Nephew informed the Company that they would not
make their required minimum purchases under the contract. Based upon
provisions in the agreement, the Company terminated Smith & Nephew's exclusive
distribution rights. Under terms of the agreement, Smith & Nephew retained non-
exclusive rights to distribute the BAK outside of the United States for a
period of one year from notification of termination of exclusive rights. The
Company has been appointing independent international distributors on a country
by country basis to distribute the BAK product line. There can be no assurance
that the Company will be successful in identifying and appointing independent
international distributors who will be able to successfully sell the BAK
product line.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Net sales increased to $16.0 million for the three months ended September
30, 1997 from $1.5 million for the three months ended September 30, 1996. Net
sales for the period were primarily affected by the previously discussed FDA
approval to market the BAK in the United States. For the three months ended
September 30, 1997, domestic BAK sales accounted for 92% of net sales, as
compared to 87% of net sales for the three months ended September 30, 1996.
Total domestic sales increased to $15.2 million for the three months ended
September 30, 1997 from $1.2 million for the three months ended September 30,
1996. Total international sales increased to $864,000 for the three months
ended September 30, 1997 from $326,000 for the three months ended September 30,
1996. International sales for the period were primarily affected by increased
BAK sales to an expanded distributor network.
Gross profit increased to $12.5 million for the three months ended
September 30, 1997 from $1.1 million for the three months ended September 30,
1996. This increase was primarily due to the substantial increase in net sales
for the third quarter of 1997 over the third quarter of 1996. As a percentage
of net sales, gross profit was 77.6% for the three months ended September 30,
1997, as compared to 69.0% in the comparable period in 1996. This improvement
is the direct result of the increased BAK sales as a percentage of total sales.
Total operating expenses increased to $7.2 million for the three months
ended September 30, 1997 from $2.8 million for the three months ended September
30, 1996. Sales and marketing expenses increased to $4.8 million for the three
months ended September 30, 1997 from $1.3 million for the three months ended
September 30, 1996, decreasing as a percentage of net sales to 30.2%, as
compared to 85.6% for the comparable period in 1996. Most of the increase was
related to the expanding the Company's direct sales force in the United States,
increased sales commissions to both direct sales representatives and
independent sales agents, the cost of conducting surgeon BAK training programs
and increased marketing efforts. General and administrative expenses increased
to $1.5 million for the three months ended September 30, 1997 from $995,000 for
the three months ended September 30, 1996, decreasing as percentage of net
sales to 9.4%, as compared to 65.3% for the comparable period in 1996. Expense
increases relate primarily to additional personnel needed to support increased
sales activities. Research and development expenses increased to $894,000 for
the three months ended September 30, 1997, from $493,000 for the three months
ended September 30, 1996, decreasing as a percentage of net sales to 5.6%, as
compared to 32.4% for the comparable period in 1996. Research and development
expenses have increased due to the addition of personnel and increased spending
on independent research projects. Interest income totaled $342,000 for the
three months ended September 30, 1997, as compared to $293,000 for the three
months ended September 30, 1996. The increase is due to additional funds
available for short term investments during the three months ended September
30, 1997, due to the generation of cash from operations in excess of working
capital needs and capital purchases during the past twelve month period.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Net sales increased to $39.7 million for the nine months ended September
30, 1997 from $4.5 million for the nine months ended September 30, 1996. Net
sales for the period were primarily affected by the previously discussed FDA
approval to market the BAK in the United States. For the nine months ended
September 30, 1997, domestic BAK sales accounted for 92% of net sales, as
compared to 66% of net sales for the nine months ended September 30, 1996.
Total domestic sales increased to $37.4 million for the nine months ended
September 30, 1997 from $3.2 million for the nine months ended September 30,
1996. Total
<PAGE>
international sales increased to $2.2 million for the nine months ended
September 30, 1997 from $1.3 million for the nine months ended September 30,
1996. International sales for the period were primarily affected by
increased BAK sales to an expanded distributor network.
Gross profit increased to $30.7 million for the nine months ended
September 30, 1997 from $2.9 million for the nine months ended September 30,
1996. This increase was primarily due to the substantial increase in net sales
for the first nine months of 1997 over the first nine months of 1996. As a
percentage of net sales, gross profit was 77.3% for the nine months ended
September 30, 1997, as compared to 64.2% in the comparable period in 1996.
This improvement is the direct result of the increased BAK sales as a
percentage of total sales.
Total operating expenses increased to $19.0 million for the nine months
ended September 30, 1997 from $6.3 million for the nine months ended September
30, 1996. Sales and marketing expenses increased to $12.3 million for the nine
months ended September 30, 1997 from $2.6 million the nine months ended
September 30, 1996, decreasing as a percentage of net sales to 31.0%, as
compared to 59.1% for the comparable period in 1996. Most of the increase was
related to expanding the Company's direct sales force in the United States,
increased sales commissions to both direct sales representatives and
independent agents, the cost of conducting surgeon BAK training programs and
increased marketing efforts. General and administrative expenses increased to
$4.3 million for the nine months ended September 30, 1997 from $2.3 million for
the nine months ended September 30, 1996, decreasing as percentage of net sales
to 10.9%, as compared to 51.9% for the comparable period in 1996. Expense
increases relate primarily to additional personnel needed to support increased
sales activities. Research and development expenses increased to $2.4 million
for the nine months ended September 30, 1997, from $1.4 million for the nine
months ended September 30, 1996, decreasing as a percentage of net sales to
5.9%, as compared to 30.6% for the comparable period in 1996. Interest income
totaled $747,000 for the nine months ended September 30, 1997, as compared to
$1.1 million for the nine months ended September 30, 1996. The decrease is due
to the reduced amount of funds available for short term investments during the
nine months ended September 30, 1997 resulting from the use of cash to fund
working capital needs and capital purchases during the past twelve month
period.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended September 30, 1997, cash and cash
equivalents increased by $298,000. Of this amount, $687,000 was generated by
operating activities, $592,000 provided by the exercise of stock options, while
$248,000 was used to purchase property and equipment, and $732,000 was used to
purchase short-term investments.
Until funds are needed for operating purposes, they have been invested
primarily in short term U.S. government obligations and corporate debt
securities. As of September 30, 1997, the Company had $20.1 million of these
investments, of which $18.9 million mature in one year or less. The Company
believes that its currently available cash and cash equivalents combined with
additional cash flow from operations will be adequate to finance ongoing
operations for the foreseeable future.
The Company's future liquidity and capital requirements will depend on
numerous factors, including FDA regulatory actions and continued domestic and
international sales of its entire product line.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The medical device market is characterized by frequent and substantial
intellectual property litigation. Intellectual property litigation is complex
and expensive, and the outcome of such litigation is difficult to predict.
The Company is not aware of any patent infringement charge or any
violation of other proprietary rights claimed by any third party relating to
the Company or the Company's products, except as set forth below. However, no
assurance can be given that the Company or its products will not become the
subject of such a claim in the future. Any future litigation could result in
substantial expense to the Company and significant diversion of effort by its
technical and management personnel. Litigation may also be necessary to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by it or to determine the enforceability, scope and validity of the
proprietary rights of others. An adverse determination in any such proceeding
could subject the Company to significant liabilities to third parties, or
require it to seek licenses from, and pay substantial royalties to, third
parties. Furthermore, there can be no assurance that necessary licenses would
be available to the Company on satisfactory terms, or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing and
selling certain of its products, which would have a material adverse effect on
its business, financial condition and results of operations.
The Company is involved in litigation related to its license of the Karlin
Technology from Dr. Michelson and Karlin, co-owners of the Karlin Technology.
The litigation principally relates to the interpretation of Dr. Michelson's and
Karlin's right to co-license the Karlin Technology to a third party and the
inventorship of one of the Company's patents. In December 1993, Dr. Michelson
and Karlin filed a complaint against the Company and Smith & Nephew Group, an
entity under common control with Smith & Nephew, in United States District
Court, Central District of California. In December 1994, the plaintiffs served
the defendants with a second amended complaint (the "Complaint"). The Company
filed an answer to the Complaint in January 1995 denying the material
allegations and setting forth affirmative defenses. The Complaint alleged
various causes of action, including tortious interference with prospective and
contractual business relationships, unfair competition and breach of contract,
and requested various types of relief, including money damages, injunctive
relief and declaratory judgment. In addition, in the event the Company
objected to the co-license of the Karlin Technology to a third party, the
Complaint requested rescission of the license agreement. Danek, a competitor
of the Company, is the other co-licensee of the Karlin Technology. The Company
is not contesting the co-license of the Karlin Technology to Danek. On
February 12, 1996, the court entered Judgment finding that the Company is the
prevailing party on all counts of the Complaint. On July 3, 1997, the Ninth
Circuit Court of Appeals affirmed the Judgment, and on August 1, 1997, that
court denied Karlin's and Dr. Michelson's petition for a rehearing en banc.
On June 19, 1995, the Company received a purported notice of termination
of the Karlin license agreement based on alleged inadequacy in the reporting of
the royalty payments due by the Company to Karlin under the license agreement.
Karlin has claimed that the Company has therefore breached the license
agreement. The Company denies, however, that it has breached the agreement.
Under the terms of the agreement, the license agreement may not be terminated
until after a final, non-appealable determination of the existence of the
breach by a court of competent jurisdiction. The license agreement also
provides for non-binding arbitration and the right of a breaching party to cure
a breach by adopting the recommendation of the arbitrator. On September 15,
1995, the Company commenced a non-binding arbitration against Dr. Michelson and
Karlin in Minneapolis before the American Arbitration Association (the "AAA")
asserting that the purported termination of the license agreement is meritless
and ineffective. Dr. Michelson and Karlin have taken the position in the
arbitration that they do not intend to seek to enforce the purported
termination. They also contend, however, that they may in the future terminate
the license agreement if the royalty reports are determined to have been
inadequate. Although the Company believes that a valid termination of the
agreement will not be a remedy available to Karlin and Dr. Michelson, a
determination against the Company could have a material adverse effect on the
Company's business, financial condition and results of operations.
<PAGE>
On August 13, 1996, Karlin and Dr. Michelson filed an arbitration before
the AAA in Los Angeles. Karlin and Michelson seek in this arbitration (i) an
award of royalties which they claim the Company has not paid, and (ii) a
declaration that Dr. Michelson is the inventor of certain surgical methods used
by or claimed to be invented by the Company, damages for failure to give
Dr. Michelson inventive credit for these methods, and an order that the Company
place corrective advertising to ameliorate the purported failure. After the
Company objected to Los Angeles as the forum for this arbitration, the AAA
transferred the arbitration to Minnesota so that it could be coordinated with
the prior pending arbitration filed by the Company. Both arbitrations are
currently pending before the AAA in Minnesota. No discovery has yet taken
place and no hearing dates have been set.
The Company and Karlin and Dr. Michelson are also in litigation in the
United States District Court for the District of Minnesota concerning
inventorship of U.S. Patent No. 5,489,307. Prior to the issuance of the patent
to the Company, Dr. Michelson in the above-referenced California action
asserted that he was the true inventor of the then pending patent application
for the patent. This claim was dismissed for lack of a justiciable
controversy. In the Minnesota action brought by the Company, Dr. Michelson
filed a motion to dismiss for lack of personal jurisdiction, which was denied.
Karlin and Dr. Michelson then filed a motion to dismiss, transfer or stay the
action, asserting that the action should be heard only in the United States
District Court for the Central District of California. In April 1997, the
Minnesota court denied the motion to dismiss or transfer, but granted the
motion to stay pending the decision of the Ninth Circuit Court of Appeals. In
June 1997, Karlin and Dr. Michelson moved to transfer the action to the Central
District of California, where the action described below is pending. This
motion has been taken off the calendar pending resolution of the Company's
motion which is described below. On December 16, 1996, Karlin and
Dr. Michelson filed an action against the Company in the United States District
Court for the Central District of California. The complaint seeks
(i) declaratory relief that Dr. Michelson is the true inventor and owner of the
patent, or, in the alternative, that the patent is invalid; (ii) unspecified
damages and an injunction based upon the Company's acquisition and exploitation
of the patent; (iii) unspecified damages and termination of the Karlin license
agreement based upon numerous allegedly false representations made by the
Company in connection with the entry into the license agreement;
(iv) unspecified damages for alleged disparagement of title in connection with
the bilateral predistraction method and associated instruments specified in the
patent; (v) unspecified damages for breach of fiduciary duty in connection with
alleged failures by the Company to pay royalties due and the Company's conduct
related to the patent; (vi) unspecified damages for misappropriation of trade
secrets in connection with the application for and exploitation of the patent;
and (vii) unspecified damages for statutory unfair competition in connection
with the same alleged conduct. The complaint also seeks unspecified punitive
damages. On August 24, 1997 the Company moved to dismiss this action on the
grounds that it relates to the same subject matter as the first filed action by
the Company pending in the District of Minnesota. The Company's motion is
currently pending. Although the Company believes that neither a termination of
the agreement nor substantial damages will be remedies available to Karlin and
Dr. Michelson in this action, a determination against the Company could have a
material adverse effect on its business, financial condition and results of
operation.
Surgical Dynamics, a competitor of the Company, has filed a complaint for
declaratory judgment in the United States District Court for the Central
District of California of patent invalidity, unenforceability and
non-infringement against Karlin and Danek regarding the U.S. Patent
No. 5,015,247, which is part of the Karlin Technology. Karlin and Danek have
counterclaimed against Surgical Dynamics claiming patent infringement. On
June 2, 1997, the court granted partial summary judgment to Surgical Dynamics,
ruling that its implant does not infringe the '247 patent. The court also
denied summary judgment to Surgical Dynamics on its claim that the '247 patent
is invalid. Karlin and Danek have filed an interlocutory appeal to the Federal
Circuit Court of Appeals. The outcome of the litigation is uncertain. There
can be no assurances that the patent related to the Karlin Technology will be
upheld or that the Company will continue to have such patent protection for its
products.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Amended and Restated Articles of Incorporation of the Company. (1)
(2) (3)
3.2 Restated By-Laws of the Company and Amendment to Restated By-Laws of
the Company. (4)
4.1 Specimen of Common Stock certificate. (5)
4.2 Form of Rights Agreement dated as of August 21, 1996 between the
Company and Norwest Bank Minnesota, N.A. (3)
10.1 1994 Spine-Tech, Inc. Stock Option Plan.* (6)
10.2 Spine-Tech, Inc. 1993 Non-Employee Director Stock Option Plan.* (7)
10.3 Spine-Tech, Inc. 1991 Stock Option Plan.* (8)
10.4 Loan Agreement between the Company and Riverside Bank dated April 20,
1995. (9)
10.5 Spine-Tech, Inc. 1996 Employee Stock Purchase Plan.* (10)
10.6 Spine-Tech, Inc. 1996 Omnibus Stock Plan.* (11)
10.7 License Agreement dated as of May 10, 1992, among the Company, Karlin
Technology, Inc. and Gary K. Michelson. (12) (13)
10.8 License Agreement dated as of January 1, 1995 between the Company and
Dr. Ted Obenchain. (13) (14)
10.9 Employment Agreement between the Company and David W. Stassen dated
June 15, 1992.* (15)
10.10 Employment Letter from the Company to David W. Stassen dated
June 2, 1992.* (16)
10.11 Employment Agreement between the Company and Ted K. Schwarzrock
dated November 1, 1993.* (17)
10.12 Management Agreement dated as of February 1, 1996 between the
Company and David W. Stassen. (18)
10.13 Management Agreement dated as of February 1, 1996 between the
Company and Keith M. Eastman.* (19)
10.14 Management Agreement dated as of February 1, 1996 between the
Company and Ted K. Schwarzrock.* (20)
10.15 Management Agreement dated as of February 1, 1996 between the
Company and Douglas W. Kohrs.* (21)
10.16 Management Agreement dated as of February 1, 1996 between the
Company and Richard C. Jansen.* (22)
<PAGE>
10.17 Management Agreement dated as of February 1, 1996 between the
Company and David L. Shaw.* (23)
10.18 Collaboration agreement between the Company and Ethicon Endo
Surgery dated June 27, 1994. (24)
11 Statement of Computation of Net Income (Loss).
27 Financial Data Schedule (filed electronically).
_____________________________
* Management contract of compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K.
(1) Incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1995 (File
No. 0-26116).
(2) Incorporated herein by reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 (File No.
0-26116).
(3) Incorporated herein by reference to Exhibit 1 to the Company's Current
Report on Form 8-K dated August 21, 1996.
(4) Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1996.
(5) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(6) Incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(7) Incorporated by reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(8) Incorporated by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(9) Incorporated by reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(10) Incorporated by reference to Exhibit 10.13 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(11) Incorporated by reference to Exhibit 10.14 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(12) Incorporated by reference to Exhibit 10.17 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(13) Exhibit contains portions for which confidential treatment has been
granted to the Company.
(14) Incorporated by reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
<PAGE>
(15) Incorporated by reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(16) Incorporated by reference to Exhibit 10.20 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(17) Incorporated by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(18) Incorporated by reference to Exhibit 10.22 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(19) Incorporated by reference to Exhibit 10.23 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(20) Incorporated by reference to Exhibit 10.24 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(21) Incorporated by reference to Exhibit 10.25 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(22) Incorporated by reference to Exhibit 10.26 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(23) Incorporated by reference to Exhibit 10.27 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(24) Incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(b) Reports on Form 8-K
No reports were filed during the quarter ended September 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SPINE-TECH, INC.
(Registrant)
Date: November 7, 1997 By: /s/ David W. Stassen
------------------------------
David W. Stassen,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 7, 1997 By: /s/ Keith M. Eastman
------------------------------
Keith M. Eastman,
Chief Financial Officer
(Principal Financial and Accounting
Officer)
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
3.1 Amended and Restated Articles of Incorporation of the Company. (1) (2)
(3)
3.2 Restated By-Laws of the Company and Amendment to Restated By-Laws of the
Company. (4)
4.1 Specimen of Common Stock certificate. (5)
4.2 Form of Rights Agreement dated as of August 21, 1996 between the Company
and Norwest Bank Minnesota, N.A. (3)
10.1 1994 Spine-Tech, Inc. Stock Option Plan.* (6)
10.2 Spine-Tech, Inc. 1993 Non-Employee Director Stock Option Plan.* (7)
10.3 Spine-Tech, Inc. 1991 Stock Option Plan.* (8)
10.4 Loan Agreement between the Company and Riverside Bank dated April 20,
1995. (9)
10.5 Spine-Tech, Inc. 1996 Employee Stock Purchase Plan.* (10)
10.6 Spine-Tech, Inc. 1996 Omnibus Stock Plan.* (11)
10.7 License Agreement dated as of May 10, 1992, among the Company, Karlin
Technology, Inc. and Gary K. Michelson. (12) (13)
10.8 License Agreement dated as of January 1, 1995 between the Company and
Dr. Ted Obenchain. (13) (14)
10.9 Employment Agreement between the Company and David W. Stassen dated June
15, 1992.* (15)
10.10 Employment Letter from the Company to David W. Stassen dated June 2,
1992.* (16)
10.11 Employment Agreement between the Company and Ted K. Schwarzrock dated
November 1, 1993.* (17)
10.12 Management Agreement dated as of February 1, 1996 between the Company
and David W. Stassen. (18)
10.13 Management Agreement dated as of February 1, 1996 between the Company
and Keith M. Eastman.* (19)
10.14 Management Agreement dated as of February 1, 1996 between the Company
and Ted K. Schwarzrock.* (20)
10.15 Management Agreement dated as of February 1, 1996 between the Company
and Douglas W. Kohrs.* (21)
10.16 Management Agreement dated as of February 1, 1996 between the Company
and Richard C. Jansen.* (22)
<PAGE>
10.17 Management Agreement dated as of February 1, 1996 between the Company
and David L. Shaw.* (23)
10.18 Collaboration agreement between the Company and Ethicon Endo Surgery
dated June 27, 1994. (24)
11 Statement of Computation of Net Income (Loss). Filed Electronically
27 Financial Data Schedule. Filed Electronically
_____________________________
* Management contract of compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K.
(1) Incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1995 (File
No. 0-26116).
(2) Incorporated herein by reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 (File No. 0-
26116).
(3) Incorporated herein by reference to Exhibit 1 to the Company's Current
Report on Form 8-K dated August 21, 1996.
(4) Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1996.
(5) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(6) Incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(7) Incorporated by reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(8) Incorporated by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(9) Incorporated by reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(10) Incorporated by reference to Exhibit 10.13 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(11) Incorporated by reference to Exhibit 10.14 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(12) Incorporated by reference to Exhibit 10.17 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(13) Exhibit contains portions for which confidential treatment has been
granted to the Company.
<PAGE>
(14) Incorporated by reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(15) Incorporated by reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(16) Incorporated by reference to Exhibit 10.20 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(17) Incorporated by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
(18) Incorporated by reference to Exhibit 10.22 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(19) Incorporated by reference to Exhibit 10.23 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(20) Incorporated by reference to Exhibit 10.24 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(21) Incorporated by reference to Exhibit 10.25 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(22) Incorporated by reference to Exhibit 10.26 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(23) Incorporated by reference to Exhibit 10.27 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(24) Incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1 (Registration No. 33-91928).
<PAGE>
SPINE-TECH, INC.
EXHIBIT 11---STATEMENT RE: COMPUTATION OF INCOME (LOSS) PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
1997 1996 1997 1996
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
PRIMARY INCOME (LOSS) PER SHARE:
Weighted average shares outstanding 10,170,428 9,874,087 10,091,602 9,802,178
Net effect of dilutive stock options --
based on the treasury stock method 1,572,280 -- 1,382,011 --
------------- -------------- ------------- -------------
11,742,708 9,874,087 11,473,613 9,802,178
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Net income (loss) $ 3,329,187 $ (1,448,718) $ 7,468,502 $ (2,389,179)
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Primary income (loss) per share $ 0.28 $ (0.15) $ 0.65 $ (0.24)
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
FULLY DILUTED INCOME (LOSS) PER SHARE:
Weighted average shares outstanding 10,170,428 9,874,087 10,091,602 9,802,178
Net effect of dilutive stock options --
based on the treasury stock method 1,572,280 -- 1,545,079 --
------------- -------------- ------------- -------------
11,742,708 9,874,087 11,636,681 9,802,178
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Net income (loss) $ 3,329,187 $ (1,448,718) $ 7,468,502 $ (2,389,179)
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Fully diluted income (loss) per share $ 0.28 $ (0.15) $ 0.64 $ (0.24)
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS OF SPINE-TECH, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000889842
<NAME> SPINE-TECH, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,269,045
<SECURITIES> 20,128,444
<RECEIVABLES> 9,282,889
<ALLOWANCES> 461,862
<INVENTORY> 6,685,703
<CURRENT-ASSETS> 37,510,416
<PP&E> 7,656,805
<DEPRECIATION> 897,346
<TOTAL-ASSETS> 45,466,695
<CURRENT-LIABILITIES> 4,483,821
<BONDS> 0
0
0
<COMMON> 102,200
<OTHER-SE> 40,880,674
<TOTAL-LIABILITY-AND-EQUITY> 45,466,695
<SALES> 39,689,428
<TOTAL-REVENUES> 39,689,428
<CGS> 8,996,933
<TOTAL-COSTS> 8,996,933
<OTHER-EXPENSES> 18,988,262
<LOSS-PROVISION> 393,500
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,451,502
<INCOME-TAX> 4,983,000
<INCOME-CONTINUING> 7,468,502
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,468,502
<EPS-PRIMARY> .65
<EPS-DILUTED> .64
</TABLE>
